Investors in securities (shares and bonds) listed in the stock market buys and sells shares and bonds and in the process benefits from the regulatory framework that listed companies have to follow as part of their listing and continuous listing obligations. But digging a little deeper, one will notice that most investors are unaware of what these regulatory processes actually are and the powers that stock exchanges, such as the Dar es Salaam Stock Exchange (DSE), holds in order to ensure regulations are followed for the purpose of protecting investors interests, up to a certain level. However, with investors knowledge or otherwise, there is, in fact, quite a lot happening in the background that the exchanges pursues with listed companies when it comes to good corporate governance practices, starting with the actual listing procedure — which I covered in lengthy two weeks ago.
In that article, two weeks ago, I also indicated that often times, shareholders of listed companies, in our local environment, do not understand their roles in a company that they have invested into. I indicated that some investors will cut links with the company they have invested into soon after the Initial Public Offering (IPO) process is completed. In future corporate actions such as dividend payments, AGMs, bonus or rights share issuance would not concern them either due to lack of information or lack of interest or both. In some cases, these investors tend to think that it is either the role of the capital markets regulator or the stock exchange to protecting and look into their interests even in matters such as those involving corporate actions. In today’s article I will explain the role of exchange on listing companies, particular in ensuring good governance.
It is true that, the DSE controls the listing process for any company intending to list into the Exchange either in its Main Investment Market (MIM) segment or its Enterprise Growth Market (EGM) segment. Companies applying to list in either of the two segment would have to meet a number of requirements in order to be granted a listing. These requirements ranges from the size of capital, minimum number of shareholders, directors and board committee, to matters pertain to historic results, size of the company, its future outlook and the like. For the EGM listing, requirements are actually less strict as it is meant to facilitate capital raising for small and medium enterprises and newer business ventures with relatively shorter history, smaller amount of capital and few shareholders. Because of lesser stricter listing condition, there is a requirement that companies listing in the EGM also need to have a specialised adviser (a Nominated Adviser) who is trained, licensed and regulated by the capital markets regulator. Such an adviser helps these companies with regulations during the process of listing and after the company has been listed to ensure compliance to listing obligation and good corporate governance practices.
As it is, once listed, companies must then ensure compliance with listing requirements. Importantly, they are required also to comply with Companies Act, which regulates shareholders rights, board meetings, annual general meetings and other company-related issues. Listed companies must also comply to various regulations as stipulated by the capital markets regulator from time to time — key to this are guidelines on good corporate governance. Breach of the act, rules and regulations will not only result to suspension and cancellation of listing — in some cases it is a legal issue and as such becomes a court process. What happens with NICOL is the case at hand. What needs to be noted up to this point is fact that: its is once a company is listed that the DSE can truly begins to manage the process and regulations of its listed companies life. Therefore, prior to listing, listed companies to are required to abide not only with legal requirements of being a business entity but also with listing preconditions. Any breach of these will see the DSE step in and censure such a company.
As an example, listed companies are required to publish their financial results twice a year (interim and year end), with the letter being audited with the auditor that has been resisted with the National Board of Accountants and Auditors (NBAA). Such results should be published within three months of period end and should be published in newspapers with wider circulation. Should a company fail to do so within the required timeframe, the DSE may suspend their listing. Publishing results is a very important part of the process of a listed company to engage and communicate with its shareholders and the general public — it provides information about financial performance results, trading updates, directors’ stake in the company, expected corporate actions such as dividend announcement, etc. This particular activity serves two important purposes in relation to a listed company, apart from informing shareholders and the public, it also serve to provide everybody with access to information at exactly the same time — so as to avoid cases of inside trading and price manipulation. Therefore, it publishing financial results levels the playing field, putting small retail investors in the same shoes as large institutional investors when it comes to access to the company’s vital information. It is for this reason that the Exchange is so very strict about the information being published in the newspapers that has wider circulation.
let us go back to some of the extreme measures that the Exchange can execute in cases of breach of continuous listing requirements including non-compliance to good corporate governance. Upon such incidence(s) some of the disciplinary measures are: placing the company into a non-compliant board, which is a separate trading segment to enable the company resolve the problems before being admitted again the normal board, and if (within 12-months) the company fails to comply or address issues that resulted into disciplinary measure; the DSE may deem it fit to suspend and/or cancel the company’s securities from trading in the Exchange — all this is done in order to protect investors’ interests. Suspension or cancellation means that the company shares can not be traded in the Exchange. Even in such situations shareholders still own the shares and retain all rights (like the case with NICOL), and the entity must continue following other legal compliances as provided in the Companies Act. However, no trading can take place until such a time as the suspension is uplifted or re-application for listing in the case of cancellation.
A listing can be suspended for a number of reasons i.e. accounts manipulation; non-publication of financial results; failure to hold mandatory meetings of the board and shareholders, if there is price-sensitive information that is in the market that hasn’t been published for access by all shareholders and the general public, when the company is declared bankruptcy etc. There are circumstances where a listed company can also request a suspension of trading of its shares in the Exchange by its own, this is when the company feels that there is information in the market that they are not yet able to provide clarity and details on.